Newnations Prescriptions

Heavily indebted and vulnerable to the effects of the European economic crisis, Hungary is becoming increasingly unstable under its authoritarian government and ultra nationalism is on the rise.

Hungary has had a persistent debt problem for the past decade. When the country became independent after the collapse of the Soviet Union in 1991 it made a smooth transition to a market economy and, by 1995, nearly half of the country’s economic enterprises had been privatised. By 1998, Hungary was attracting nearly half of all foreign direct investment in central Europe and the country joined the EU in 2004.

But the good times didn’t last and a high level of both private and state borrowing left the country in a state of disarray when the global economic crisis began in 2008. In October of that year the government was forced to ask the International Monetary Fund and the European Central Bank for massive loans to prevent total economic collapse and the country received a €12.5bn bailout.

The economy continued to teeter on the brink and President Viktor Orban was only able to balance the books in 2011 by raising sales taxes, imposing a windfall levy on banks and foreign companies and by nationalising the country’s compulsory private pension scheme – harsh measures that lowered the standard of living. The national currency, the forint, lost a fifth of its value against the euro in the second half of last year and GDP contracted 1.2 percent in the first quarter of this year compared with the last quarter of 2011. On January 6 this year, Hungary’s debt was downgraded for the third time in two months and is now “junk” status.

Laden with the highest debt in south-eastern Europe, Hungary is seeking a multi-billion euro loan from the IMF and the EU. The lenders are reticent about giving Hungary any more cash, saying that one of Hungary’s laws could undermine the independence of the country’s central bank. Parliament put off a vote on amendments to the disputed law in the first week of June and investors now hope that the government will change the legislation so that it will satisfy the IMF and the European Central Bank and loan arrangements can be put in place.

On June 7, Sandor Csanyi, Chairman and Chief Executive of OTP Bank, said: “The signs from the past few days have been positive. I hope the path will open shortly so [Hungary] can sit down for talks with the International Monetary Fund.”

However, on June 17, in an interview with Austrian paper Die Presse, Orban dismissed the idea that Hungary couldn’t survive without outside assistance. “We are able to finance the state without IMF loans, but the interest rates on bonds are very high. The question is not whether we can finance the state, the question is at what price,” Orban said.

The president went on to say that the country’s finances could handle high borrowing costs this year and the next and that “Hungary does not intend to live off IMF money,” but it would be useful to have a buffer for “worst-case scenarios”.

This problem of the Central Bank’s potential lack of independence has also kept Hungary out of the euro. On May 30, the European Central Bank released a report saying that none of the eight countries on the waiting list to join the single currency – Hungary, Bulgaria, the Czech Republic, Latvia, Lithuania, Poland, Romania and Sweden – currently meet the required standards.

“In none of the eight countries examined, the legal framework is fully compatible with all requirements from the adoption of the euro as laid down in the Treaties and the Statute of the European System of Central Banks and of the ECB,” the ECB said.

Speaking about all countries under review, the ECB report went on to say that “Incompatibilities remain regarding central bank independence.”

The eurozone crisis is putting emerging markets in Europe – especially Hungary – in a precarious position because of their dependence on loans from foreign banks. Although Greece’s pro euro party, New Democracy, won the June 17 election, helping to calm fears that Greece will exit the single currency, the eurozone is not out of the water.

While analyst David Lennox of Fat Prophets thinks that the worst of the Greek crisis could now be over, Adrian Slack, head of equities at Bastion Capital, says “Fundamentally, the problems [in Greece and the eurozone] haven’t changed.” BBC business correspondent Robert Peston agrees, saying that bankers have told him Greece needs “eurozone governments and the European Central Bank to write off a big slug of what they are owed”. In the meantime, Spain’s borrowing costs have been hitting record highs and Moody’s rating agency has cut Spain’s credit rating to one notch above “junk”.

The deepening euro crisis would cause payments on foreign currency loans to jump up, squeezing ordinary Hungarians further. Middle-class people in the country are already fed up at the steep decline in the value of their savings and many have been badly hit by mortgages that were taken out in Swiss francs during the mid 2000s.

Amidst this financial doom and gloom, politics in Hungary looks set to shift. The popularity of the ruling party, Fidesz, which stood at 68 per cent in 2010, has plummeted to around 17 per cent, and the opposition socialists have almost caught up with them at 15 per cent. Ultra nationalism is on the rise:1,000 people attended the unveiling ceremony on June 16 in Csokako, 87 km (54 miles) west of Budapest, of a statue to Miklos Horthy, Hungary’s leader during WW2 and an ally of Hitler; three far-right writers will be brought back to the school curriculum this autumn; and Fidesz MPs tore apart a bill to set up a parliamentary committee against racism.